Panel Examines Causes, Consequences of U.S. Financial Crisis

The Oct. 1 School of Economics and Business Administration panel included (from left) Roy Allen, Jack Rasmus, Andrew Williams, Asbjorn Moseidjord and Shyam Kamath. The event was sponsored by the Graduate Business Alumni Council.As the nation continues to grapple with its most significant economic crisis in decades, School of Economics and Business Administration professors offered their take on the financial situation in a panel at the Soda Center on Oct. 1.

The scope of damage from decreasing U.S. housing prices and fallout from financial firms' speculative investment strategies remains to be determined. But several panelists indicated that fundamental economic changes have contributed to the sharpness of the U.S. downturn that is spreading to the global economy.

"Financial liberalization, deregulation, technological change and globalization have played a role in increasing the speed and risk of financial cycles," business school dean Roy Allen told an audience of close to 80 people. "There was a boom in monetary wealth in the early 1980s up to the bursting of the housing market bubble in 2006. A turning point was when supply of credit contracted."

Panelists cited the threat of frozen credit markets, which businesses and consumers rely on in their day-to-day transactions, as a reason to support a plan similar to the $700 billion bailout Congress is considering.

"Rather than a bailout, this is better characterized as a ‘chaos prevention program' to prevent us from all getting caught up in the chaos," business professor Andrew Williams said. "But people need to see the solution as fair and equitable."

The prospect of taxpayers footing a $700 billion bailout bill has evoked fear and anger among voters who haven't benefited from recent economic booms, according to economics professor Asbjorn Moseidjord. But these emotions and pressure from voters may help guide Congress to establish important safeguards.

"It's important for taxpayers to have a strong advocate in the House and Senate," Moseidjord noted, saying that a slight delay in the bailout might be acceptable "if putting a foot down serves taxpayers well in the long run."

Even if a bailout passes, however, many economists say they don't expect it to immediately reverse the U.S. economy's negative direction. Economics professor Jack Rasmus said adding more liquidity to banks through a bailout won't wipe out the bad debt that has accumulated throughout the economy over the last several years. Nor will it necessarily halt the collapse of housing prices, which he says may fall another 20 percent.

"Liquidity solutions in cases of severe debt-asset deflation crises have worked only when asset prices have reached bottom, such as in 1990 and in 1934," Rasmus said. "We may have to wait until (housing) asset prices drop further for liquidity and bad debt buyout solutions by the government to work."

The situation will also be complicated by the spread of uncertainty throughout the increasingly integrated global economy. Global business professor Thomas Gomez-Arias pointed to symptoms ranging from massive bank failures in Europe to the collapse of the Shanghai housing market as signs that the financial turmoil is not confined to the United States.

"The financial world is interconnected," Gomez-Arias said. "It's not a U.S. problem but a global problem with similar causes - too much liquidity and problems in the banking system."

With the financial crisis occurring on the eve of the 2008 election, several panelists said that they expect changes in the nation's financial regulatory structure during the next year. Associate dean and business and economics professor Shyam Kamath said that improving the nation's financial infrastructure through college-level education in personal finance, automatic enrollment of workers in financial planning options like 401(k)s and greater financial disclosure in all aspects of the financial sector are important steps.

"Any effort to improve the financial infrastructure means that when crises are likely to happen – and they will happen – we'll be better able reduce their likelihood and alleviate the impact," Kamath said.

--John Grennan

Office of College Communications

Photo by Gabrielle Diaz '11